Pachter explains Wii U “mistake” comment

Industry analyst Michael Pachter has clarified comments from earlier in the week about the Wii U and 3DS, arguing that poor hardware sales will keep software sales low, leading to tough times for the big N.

“My comment about the Wii U being a “mistake” from which the company “may not recover” was intended to say that if Wii U sales don’t materially improve, Nintendo is unlikely to be profitable,” he clarified.

“They have around ¥1 trillion (around $11 billion) in cash, so they aren’t in danger of going out of business for decades. However, if they aren’t profitable, they aren’t doing a good job for shareholders.”

Pachter said that neither the 3DS nor the Wii U are generating profits, citing various publicly available figures to back up his claims, leaving Nintendo to wring profits out of software.

“Nintendo is ensured high sales of its proprietary software, but it makes the most money on its royalty business, collecting fees from third parties for the privilege of letting them put out games on Nintendo platforms. My call is that if hardware sales don’t materially improve above current combined levels, software sales are unlikely to materially grow,” he said.

“If software sales don’t materially improve, losses or break even will become the norm. Nintendo will not ‘recover’ to its formal highly profitable glory.”

Pachter said poor January sales of the Wii U are likely to scare off third-parties, pointing out that Grand Theft Auto 5 isn’t coming to the system.

“I have spoken to several publishers who are skeptical, and I think that the Wii U will see a lower level of third party support than the Wii did, unless sales materially improve. If I’m wrong, I’ll admit it, but without third party titles, Nintendo will not generate its customary levels of royalties, and losses or break even could become the norm,” he added.

Pachter gave a detailed break down of Nintendo’s financial performance to show that the 3DS is not anywhere near as profitable as the DS despite matching its sales records, noting that smartphone competition is partly to blame.

“If Nintendo doesn’t make a profit on hardware, they can’t afford to cut prices further. If they do cut price, it will likely occur as their manufacturing costs come down, but I don’t expect big hardware profits in the foreseeable future,” he said.

“They are stuck with software profits, and at current sales levels, they are unlikely to make an overall profit from software.”